Welcome to where where we find ourselves at the end of The Howard years...
Back in 1997 when the Howard government was young, financial markets took a set against a a number of Asian countries including Indonesia. Its currency plunged 60 per cent. There was mass unemployment, rioting, regime change, austere medicine imposed by the International Monetary Fund which made things worse and the loss of 13 per cent of GDP.

And yet, as the winner of this year's Nobel Prize in economics Paul Krugman points out in the new edition of his book The Return of Depression Economics, Indonesia's current account deficit at the time was smaller than Australia's. Its standard of living was more sustainable than ours.

A country's current account deficit is the measure of the foreign dollars that it pays out to rest of the world each quarter over and above the foreign dollars that come in. It can only be sustained by ever-growing foreign borrowing.

Since the Asian economic crisis - the bullet that Australia missed - our current account deficit ratio has doubled. What we pay out over and above what we take in now amounts to roughly 6 per cent of our GDP. That's quite an achievement for a nation at the end of five years of an almost-unprecedented export boom. Our imports have climbed faster.

Much of the increased import spending has been on mining equipment and the like - a necessary counterpart to the resources boom.

But much of the rest has been on consumer goods: roughly 50 per cent more on consumer electrical imports such as plasma TVs, almost 70 per cent more on imported food - all within the space of five years.

The Howard government helped, announcing personal income tax cuts in each of 2003, 2004, 2005, 2006 and 2007. Tax breaks - either outright exemptions or concessions - soared from $50 billion to $73 billion. Government spending jumped by one third. At a time when employment generally climbed 15 per cent, the Commonwealth public service (excluding Defence) swelled 25 per cent.

Almost as the fast as each wave of mining-generated cash came in, the government pushed it out where it would be spent. In its dying days it formally adopted as a campaign slogan what by then had long been its unofficial guiding principle - go for growth.

The party that in opposition had hired a "debt truck" to drive around Melbourne streets bemoaning Labor's $200 billion foreign debt, left office with a foreign debt exceeding $600 billion. During its final year we were expanding that borrowing at the rate of $200 million per day.

Much of it was spent on the not-particularly-useful exercise of bidding up the price of Australian houses. After the government halved the headline rate of Capital Gains Tax at the turn of the century Australian house prices doubled. Investors who used to account for only 20 per cent of the loans to purchase housing took out 40 per cent as they swept owner-buyers aside and pushed up prices. It used to take three to four years of a typical household income to buy a Melbourne house. It now takes seven. The US website Demographia lists Melbourne, Sydney, Adelaide, Bundaberg, and Queensland's Gold Coast as among the world's 12 least affordable markets. It identifies Melbourne as being less affordable than New York.

This makes no obvious sense from an international point of view and bears all the signs of a bubble waiting to be pricked. It has also put housing beyond the reach of Melbournians who could have once afforded it, perhaps unsustainably. But it has kept the a larger number of constituents happy. One of John Howard's parliamentary secretaries is reported to have once quipped, “rising prices make for happy voters”.

That happiness fed into a feeling of wealth, and a feeling that (perhaps aided by dipping into housing equity) it was okay for Australians to spend more than they earned each year.

Extraordinarily in 2003 Australia's household saving ratio turned negative after being in positive territory ever since records had been collected. For the first time Australians households in aggregate were spending more than they earned each pay period. We began to literally live beyond our means as our mining boom was taking hold. (Our savings ratio has since returned to positive territory and is now climbing sharply as we shut their wallets ahead of a recession.)

We could have done things differently.

Norway stands alone in the rest of the world in having had as much wealth showered on it as has Australia in the last half decade. No other nation comes close. (Canada, which has experienced the third biggest boost to its terms of trade is a distant third.)

Instead of running up a growing current account deficit, Norway built a rapidly growing current account surplus and is perhaps the most protected nation in the world from attacks by financial markets.

Whereas Australia was blessed with natural gas, coal and iron one, Norway was blessed with North Sea oil. But it knew it wouldn't last. So it moved the windfall tax revenue to an untouchable Norwegian Petroleum Fund, later renamed the Norwegian Pension Fund. Not only could the massive inflow not be paid out in tax cuts or used to expand government programs beyond all reason, most of it couldn't even be brought onshore. (It also has to investethically.)

Norwegians mightn't feel as wealthy as they might have had they gone down the Australian road. But in reality they are much wealthier, with a buffer of continuing earnings that will protect them whatever happens to China and the worldwide demand for resources.

Australia has no such buffer. Australia is in the same situation as a lottery winner who splurges the booty as it comes in spending even more than the winnings in the excitement. Norway is like a lottery winner who keeps the windfall away from the family and won't even let it in the house, banking if offshore as insurance against the day things turn nasty.

As the globe enters its first co-ordinated recession in half a century, and as the providers of finance become more jittery than they've been in generations Australia finds itself absolutely dependent on the rest of the world to maintain its standard of living, more so than Indonesia was before its currency came under attack during the Asian economic crisis.

China's surge in economic growth - the one thing that bought Australia temporary immunity from attack by financial markets - has stalled, or perhaps stopped.

Marvin Goodfriend from Carnegie Mellon University describes China's boom as “a one-off in the history of the planet earth.”

“We have never had it before in thousands of years of planet earth and we are not going to have it again in a few thousand years,” he said during a visit to Australia.

What if China's boom doesn't restart? What if instead of being a blessing Australia's abundance of resources remains as irrelevant as it is now becoming.

In its recent economic update Access Economics reminded clients that it it has long said that, "if China's surge stumbles then Australia's trading balance will be buggered". It added, "buggered it will soon be."

Access sees Australia's current account deficit jumping to a "Godzilla-like" 9 per cent of GDP next financial year, in part because it believes our recession will be milder than those overseas and we'll continue to expand our imports without the export income to pay for them.

The result might be an orderly collapse in the Australian dollar (Access sees a collapse from US 65 cents to US 56 cents) or it might be an attack on the dollar.

Its easy to understand why foreign funds managers might feel we are good candidate for such an attack. Our current account deficit would be many times the level of the Asian countries caught up in last decade's economic crisis. Our developed legal and banking system need not save us. In 1992 funds manager George Soros successuflly took on the Bank of England, making his reputation and US$ 1.1 billion in the process. Our Reserve Bank carries only small reserves of foreign exchange. It couldn't last as long as did the Bank of England.

On the face of it the United States would be as vulnerable to a capital strike or currency attack as would Australia or Britain. But the US is different. It manufactures the world's currency. It could literally print money to buy itself time.

Earlier this week The Age spoke to seven of Australia's more thoughtful economic observers. They were asked for their thoughts on the best way to stimulate things. But some said that was the wrong question. Melbourne University's John Freebairn said instead we had to get prices, spending and saving back into balance. "I for one am not worried if Australians save any tax cuts," he said. "We've been spending too much."

"Some corrections are necessary. Our housing prices have to fall. These recessions - almost as Paul Keating said, sometimes we need them to get over our bad behaviour."

Cutting interest rates toward zero as the US has done would be a bad idea, Freebairn says. The US did a similar thing at the start of this century in order to escape its 2001 recession. It helped create the sub-prime mortgage boom whose unwinding led to the crisis that is now threatening the globe.

Freebairn wants our leaders to use the present crisis to set up things up for sustainable recovery in the decades that follow. Otherwise, he says, "it's a wasted opportunity".

The former head of the Competition Commission Allan Fels wants the government to do nothing that will make Australia less competitive for the recovery which is to follow. It's already approved the gobbling up of two middle size banks by the majors and is showing signs of handing out money to whatever interest group asks for it first. "The should plan as if the recession will last for three years," he says. "And keep their eye on the sort of Australia that will emerge from it."

Gerry Harvey of the retailer Harvey Norman says he's not that fussed about getting people back into his stores in the short-term. He'd rather the government concentrated on making Australia productive.

With surprisingly little to protect us from what the future has in store after a half decade of riches we will need to work our way out of our problems carefully.